Masala Bonds – Meaning and Background (All you need to know about)

Masala Bonds : Meaning of Masala Bonds and Background of Masala Bonds.Masala bond was the first Indian bond to get listed in London Stock Exchange. IFC named it Masala bonds to give a local flavour by calling to mind Indian culture. In this article you can find complete details about Masala Bonds like – Meaning of Masala Bonds, Background of Masala Bonds etc. Recently we also provide details about “Masala Bonds – Quick Facts, Positive Side & Apprehensions“. Now you can check more details about “Masala Bonds – Quick Facts, Positive Side & Apprehensions” from below……

Meaning of Masala Bonds

These are bonds issued in the international financial markets and are denominated in Indian Rupees. This is entirely different from the existing ECB (External Commercial Borrowing) which Indian corporate use to raise funds in foreign markets. ECB are bonds or loans denominated and issued in US dollars or other foreign currencies and not in Indian Rupees. Masala bonds are issued in Indian currency and redeemed too in Indian currency, but buying and settlement are done in dollars at the prevailing exchanges of the time of issue and redemption respectively. For this USD-INR conversion, the Reserve Bank’s reference rate on date of issue will be applicable. These bonds may be placed privately or listed in stock exchanges. This paper looks at masala bonds in a detailed manner.

Background

When a few international financial institutions issued Rupee linked bonds in overseas markets, it was interesting to note that the international investors showed a keen interest for these bonds.One such financial institution which issued these Rupee denominated bonds was International Financial Corporation (IFC) which is an investment arm of the World Bank. In November 2014, IFC issued 10 year Rs.1000 crore Rupee denominated bonds in London to fund infrastructure projects in India. These bonds are listed in the London Stock Exchange too. These are the first Rupee denominated bonds to be listed in London Stock Exchange. The global investor community’s response to this issue was really encouraging.Major part of the investors for these bonds were European Insurance companies. The yield on this bond was 6.3% which is significantly above similar international bonds.

This fact made the Reserve Bank of Indiato think of expanding the scope of these bonds. Later RBI not only allowed international financial institutions but also Indian corporate to issue these Rupees linked bonds in overseas markets. Only those Indian corporate who are eligible to raise external commercial borrowings (ECB) can issue such bonds within the regulatory framework

The following framework is put in place by the RBI for issuance of Rupee linked bonds overseas.

A. Indian Corporates:

Those Indian corporate who are eligible to raise ECB are permitted to issue Rupee linked bonds overseas. Among them those which, at present, are permitted to access ECB under the approval route will require prior permission of the Reserve Bank to issue such bonds and those coming under the automatic route can do so without prior permission of the Reserve Bank.

These masala bonds may be floated in any jurisdiction that is Financial Action Task Force (FATF) compliant. The Financial Action Task Force is an intergovernmental organization which was founded in 1989. This was founded with an intention of coming up with policies to combat money laundering and terrorism financing. FATF was established on the initiative of G7 countries.

One important factor about these bonds are that the subscription, coupon payments and redemption may be settled in foreign currency. The proceeds of the bonds can be parked as per the extant provisions on parking of ECB proceeds

Amount and average maturity period of such bonds should be as per the extant ECB guidelines. The call and put option, if any, shall not be exercisable prior to completion of applicable minimum average maturity period.

The coupon on the bonds should not be more than 500 basis points above the sovereign yield of the Government of India security of corresponding maturity as per the FIMMDA yield curve prevailing on the date of issue. FIMMDA stands for the Fixed Income Money Market and Derivatives Association of India.

End use restrictions will be as applicable under the extant ECB guidelines.

For USD-INR conversion, the Reserve Bank’s reference rate on date of issue will be applicable.

B. International Financial Institutions:

International Financial Institutions of which India is a shareholding member intending to deploy the entire proceeds of the issuance in India shall not require prior permission for the issuance of Rupee bonds overseas irrespective of amount of issuance. In other cases, where an International Financial Institution (of which India is a member) wishes to retain the freedom to deploy the issue proceeds in any member country shall require prior permission from the Reserve Bank / Government of India.

C. Hedging:

Any investor in these bonds will be eligible to hedge both the foreign currency risk as well as credit risk through permitted derivative products in the domestic market. The investor can also access the domestic market through branches of Indian banks abroad or branches of foreign bank with Indian presence.

Banks incorporated in India will not have access to these bonds in any manner whatsoever